Tuesday, August 7, 2018

How to get a mortgage in 2018

Your motgage constitutes the biggest, and perhaps most meaningful, financial transaction of your life.

You’ll watch your family grow over decades within its four walls, creating lasting memories that will transform your house a home. You’ll also shell out an obscene amount of money.

If you put 10 per cent down on a $300,000 home with a 30-year fixed mortgage at 4.33 per cent interest, you’ll owe nearly $213,000 in interest over the course of the loan.

That means (a bunch of) signatures on your mortgage contract will compel you to more than half a million dollars over the next three decades in exchange for a half acre of real estate.

And the clock is ticking. Home prices, thanks to an improving economy and lack of inventory, are rising, as are mortgage rates. The adaptable and nimble, ready to jump and with savings on hand, are best positioned to take advantage.

Here’s what you need to do to get a mortgage today.

1. Strengthen your credit

Your credit score tells lenders just how much you can be trusted to repay your loan on time. The lower your credit score, the harder time you’ll have qualifying for a mortgage and the more you’ll pay in interest.

Take a look at your credit score to see where you stand – you should aim for the mid 700s. If your score is lacking, go to AnnualCreditReport.com to order three credit reports for free, and check for errors. Contact the rating agency immediately if you spot any.

Other good ideas: Pay off a revolving balance, and limit your credit card usage to just 20 per cent of your available credit. Also, don’t apply for a new card before you apply for a mortgage.

2. Know what you can afford

How much does a $300,000 home cost? That’s not a koan or a riddle, but rather a function of the mortgage you select.

A typical person puts down 10 per cent of the home price and opts for a standard 30-year fixed-rate mortgage. But changing those biases can save you hundreds of thousands in interest.

One good rule of thumb: Look for a home that costs no more than 2.5 times what you make in a year. Use Bankrate’s affordability calculator to get a more detailed estimate.

Take the example from above. If you instead opted for a 15-year mortgage, you’d save $115,000. The trade-off, of course, is that you’d owe a higher monthly payment ($1,341 vs. $2,042, in this instance.)

An extra $700 a month may be a tough ask. Consider, then, setting your gaze for a less expensive home that you can pay off quicker.

3. Build your savings

All of which means you have to save a lot.

Not only will you shell out the principle and mortgage, you’ll also owe property taxes and private mortgage insurance if your down payment is less than 20 per cent.

Aim to have the equivalent of roughly six months of mortgage payments in a savings account, even after you fork over the down payment while closing costs will run around 3 per cent of the sales price.

You’ll also likely have to spend around 3 per cent of the home price on upkeep and repairs annually, in addition to roughly $2,000 in maintenance costs.

What does that look like?

Let’s use our example from the top, again. You’ll need $30,000 for the down payment, along with at least $8,000 in savings. You’ll likely need around $9,000 for various closing costs, and another $11,000 for repairs and basic maintenance.

In this case, you should have at least $58,000 before signing on the dotted lines. And that’s with only 10 per cent down and a 30-year mortgage. Meanwhile, 2 in 5 Americans can’t pay for a $1,000 emergency out of savings.

A mortgage is much more than the rent you pay yourself.

4. Get preapproved for a mortgage

Don’t wait until you find your dream home before proving to the buyer that you mean business.

Preapproval by a mortgage lender will give you a range of what a bank is willing to lend you, while also showing the home’s current owner that you have the backing of a financial institution.

To gauge how much to potentially lend you, and at what rate, the institution will check out your employment history, credit and earnings.

Remember – it’s not 2012 anymore. The housing market is going strong, and the better you look on paper, the easier time you’ll have in buying the home you want.

5. Consider your mortgage options

The choice is greater than choosing between a 15-year and 30-year mortgage.

You need a credit score of 580 or higher to get an FHA-insured mortgage with a down payment as low as 3.5 per cent. If your credit score is between 500 and 579, you need to make a down payment of at least 10 per cent to get an FHA mortgage. But first, you would have to find a lender that would approve the loan.

Remember, though, paying less now increases what you’ll owe over time.

Borrowers can also choose between a fixed-rate and adjustable-rate mortgage. For those who like certainty, and are sensitive to spikes in your budget, fixed-rate is generally the better option. Use Bankrate.com to find the best rates.

6. Be patient, but act fast

Take time to pick a home that you see yourself living in for decades to come. Not only can you spend thousands moving and furnishing a home, you’ll likely only see your investment, such as it is, pay off if you occupy the home for at least seven years.

But when you do find a home that has the perfect blend of affordability and livability, pounce. In a competitive market, you’ll need to be aggressive.

7. Prepare for the home stretch

Huzzah — you’ve found the home and agreed on a price. Get ready for a lot of stuff to happen.

The financial institution lending you all that money will have your new home appraised, which will determine what it thinks the house is worth. Hopefully, it’s no less than what you agreed to pay, or you’ll have to get the price lowered or order a new appraisal.

(That being said, you probably don’t want to pay more for a home than what it’s worth.)

The bank will also officially approve your mortgage, and you’ll order an inspection. If anything is seriously wrong or damaged, ask for the repairs or a lower price on the home.

You’ll do a finally walk-through, order a title search and buy homeowners insurance.